Designing hedge fund indices that are both representative and investable

With investors increasingly concerned about the quality of hedge fund index return data, Felix Goltz, senior research engineer with the EDHEC Risk and Asset Management Research Centre, addresses the question of whether designing hedge fund indices that fulfil the usual requirements (in particular representative and investable) is a feasible task or not, given a variety of features that are specific to the hedge fund industry

The fact that hedge funds have started to gain widespread acceptance while remaining a somewhat mysterious asset class enhances the need for better measurement and benchmarking of their performance. Finding an index that is representative of a particular hedge fund strategy is not, however, a trivial problem.

This is due to the scarcity of information. The different indices available are constructed from different data, according to diverse selection criteria and methods of construction, leading